Turkey to renew IMF talks on financial package

By Delphine Strauss in Ankara

Published: January 27 2009 12:53 | Last updated: January 27 2009 12:53

Turkey will continue talks to secure a new financing package from the International Monetary Fund after a ten day break, prime minister Recep Tayyip Erdogan said on Tuesday after an IMF mission left Ankara without reaching an agreement.

Disagreements over fiscal reform, despite progress on other areas, caused the talks to stall, according to statements issued by the Fund and Treasury on Monday evening after more than two weeks of intense negotiations.

The inconclusive pause came as a surprise after hints from Turkey’s central bank governor that an agreement was imminent. Investors had expected concrete news before Mr Erdogan and Mehmet Simsek, treasury minister, left to attend the World Economic Forum at Davos .

Yarkin Cebeci, an economist at JPMorgan, said the delay suggested there were still big differences, or a need “for some more political commitment from Mr Erdogan.”

Despite growing impatience among investors, Turkey’s ruling AKP party has only inched towards a new IMF deal since its last $10bn stand-by programme expired in May, reluctant to accept constraints on spending in the run-up to local elections.

But the government now concedes Turkey faces a financing gap of up to $30bn in 2009, and will need to sign a stand-by arrangement giving upfront access to IMF funds. At the start of the year, it announced spending cuts designed to meet IMF concerns, though some further reductions would be required to secure a deal.

Analysts said the remaining differences, over “medium term structural fiscal reform” in the IMF’s wording, probably centred on fiscal rules and public sector reform.

Nurhan Toguc, analyst at Ata Invest, added the IMF would be unwilling to finance some planned tax cuts, restructuring of tax arrears and agricultural subsidies, and could have questions over three months of aggressive central bank rate cuts.

Mr Erdogan said he would meet John Lipsky, IMF deputy managing director, in Davos this week before talks resumed. But the halt increases the risk of a deal being postponed until after local elections in late March.

“Short-term political consideration seems to have a major impact on the economic decisions taken by the AKP government,” said Wolfango Piccoli, at Eurasia group, attacking policymakers for “complacency and a risky sense of over-confidence.”

Economists say Turkey’s economy may have contracted as much as 5 per cent in the last quarter of 2008, judging by big falls in industrial production and capacity utilisation. The ratings agency Moody’s forecasts it will contract 0.8 per cent in 2009.